Investors in the
Amerindo Technology fund could find that its stellar, 103% return this year comes with a big tax bill.
The fund realized capital gains amounting to 55% of its net asset value as of April 30, according to its prospectus. That unusually large gain means investors could be turning over a good portion of their returns to Uncle Sam at tax time.
"That's very high," says Stephanie Kendall, a mutual fund analyst with fund-tracker
. "You wouldn't want to pay over 10% or 20% normally
in capital-gains distributions."
Amerindo has not yet distributed these gains to its shareholders, as it's required to do by law. The fund has until Oct. 31, the end of its fiscal year, to make the distribution, and it could lower the final amount by offsetting it with realized losses.
Because realized capital gains are distributed to all shareholders on the record date of the distribution, shareholders who invest after April 30 could get hit with the distribution, even if they didn't take part in the fund's meteoric returns.
The $156 million fund lowered its minimum investment for A and D shares to $2,500 from $10,000 and $150,000, respectively, in late March. It attracted $10.6 million in new assets during May, according to
Financial Research Corp.
in Boston. That accounts for 42% of the new cash the fund has taken in so far this year.
A spokesman for Amerindo declined to comment.
The fund realized $6.13 per share in long-term capital gains and $8.92 per share in short-term gains through April 30. The total of $15.05 represents 55% of the fund's $27.44 net asset value that day. Short-term gains are taxed at a taxpayer's ordinary tax rate. Long-term gains are taxed at a 20% rate for most taxpayers.
Kendall says the situation illustrates the importance of researching a fund thoroughly before buying it.
"This shows that investors need to look at more than just performance when buying a fund," Kendall says. "On the whole, this is why you want to look for funds that have a low history of capital-gains payouts."
That would not have helped in this case, though. According to
, the Amerindo fund, which was launched in October 1996, has never made a capital-gains distribution.
And the fund's adviser has previously shown a knack for innovative accounting that has produced benefits for shareholders. For instance,
reported in March that Amerindo's unusually large position in
-- it accounted for as much as 43% of the fund's assets at one point -- during 1998 put it at risk of losing its mutual fund tax status. But by taking advantage of a one-time provision in the tax law, Amerindo changed the end of its fiscal year -- the day on which it had to report its holdings -- to a point in time when it met the law's diversification requirements.
But as of March 31, 1999, the fund was still heavily concentrated, with 25.8% of its assets in Yahoo!, 23.3% of its assets in
and 16.5% of its assets in
, according to its Web site.
Large realized gains aren't that surprising for a highflying technology fund like Amerindo, says Ray Liberatore, an analyst at Financial Research Corp.
"It's almost to be expected, in a sense, in such a volatile tech fund," says Liberatore. "These funds are sort of an animal unto themselves. They don't follow the traditional mutual fund analysis, and they're difficult to get a grasp on."
But a large capital-gains distribution wouldn't be such a bad thing for a fund that returned more than 100% so far this year, says Lou Stanasolovich, a financial planner with
Legend Financial Advisors
"Are you going to be upset about that return?" Stanasolovich asks. "So many people focus so much on taxes that they let it immobilize them. Yes, it's true you should avoid taxes when possible. But even in the worst of cases, it's not that bad."
But for an investor who hasn't participated in those returns, the potential capital-gains burden is a real concern, he says.
"I would not go into the fund at this point," says Stanasolovich. "On the other hand, if you're really concerned and you've been a holder of the fund for more than a year, you may want to sell it now" to avoid the distribution.
Because distributions are made on a per-share basis, Stanasolovich points out that, if investors cash out to avoid a distribution, the shareholders left behind would be hit with an even bigger distribution.
"The ones still in the fund are left holding the bag," he says.